Islamic banks in the Gulf Cooperation Council (GCC) are expected to see a rise in mergers and acquisitions (M&A) in the coming years. This trend is largely driven by the need for competitive advantage and to access growth opportunities, according to Fitch Ratings. The firm’s Head of Middle East Bank Ratings and Islamic Banking, Redmond Ramsdale, highlighted that the region is over-banked, suggesting that consolidation efforts will continue across all member countries.

Ramsdale explained that newer and smaller Islamic banks are particularly vulnerable to M&A activity due to their weaker franchises, reduced pricing power, and higher funding costs. He noted that Bahrain presents significant M&A opportunities due to its greater market fragmentation compared to regional peers, resulting in strong competition and diminished pricing power. While Bahraini authorities support M&A initiatives, Ramsdale pointed out that sound profitability and a lack of common shareholders often hinder such transactions.

Historically, many M&A deals have aimed to create new Islamic national or regional champions, such as the notable acquisition of Ahli United Bank by Kuwait Finance House (KFH) in 2022 for $11.6 billion. This acquisition not only strengthened the Islamic banking sector in Bahrain but also transitioned AUB and its subsidiaries into fully sharia-compliant entities operating in Bahrain, Egypt, and the UK. Ramsdale remarked that such transactions might be complex, especially when conventional bank subsidiaries are involved, but he anticipates that consolidation among Islamic banks will continue into 2025.

In the UAE, established Islamic banks have been consolidating their positions by acquiring smaller banks, with Dubai Islamic Bank’s acquisition of Noor Bank in 2019 serving as a prime example. This merger created one of the largest Islamic banks globally, boasting combined assets of nearly 275 billion UAE dirhams ($74.9 billion). Furthermore, Ramsdale mentioned the trend of larger conventional banks acquiring Islamic subsidiaries to tap into better growth opportunities, citing Emirates NBD’s recent cash offer to acquire the remaining 0.11% stake in Emirates Islamic Bank at 11.95 UAE dirhams per share, totaling around 69.8 million UAE dirhams.

Ramsdale concluded that across the Middle East, Islamic banks are experiencing stronger financing growth compared to their conventional counterparts, driven by the increasing adoption and awareness of Islamic finance, innovative product offerings, and the fast-paced growth of newer Islamic banks.